Mankiw and Meltzer Are Right! More Or Less

As we have been saying here, the claims that the fiscal stimulus has saved or created X number of jobs is not a simple empirical question. It must be an inference from a model that tells us what would have happened in the absence of that stimulus. Collecting reports from various firms or local governments about their job situations will not do. At best these individual reports are based on pop-theories on the part of the reporters about what would have happened.

But things are worse than this. In many cases (especially state and local governments) there is an incentive to report job creation in order to ensure the flow of stimulus funds now and in the near future.

Paul Krugman seems to think that you can make such statements about the job-creation/saving of fiscal stimulus by looking at the data. He thinks that Greg Mankiw “should be ashamed of himself” in not understanding this. Mankiw does a good job of defending himself.

Krugman also extends this criticism to Allan Meltzer who has also criticized Team Obama’s job claims.

And Brad DeLong is in the mix too. He says that Meltzer is also doing something suspect in criticizing the idea of “jobs saved.” DeLong says: “Exercise some moral responsibility, Allan. Shameless partisan hack.”

Well, this economist, for one, agrees with Mankiw and Meltzer.

When an Austrian, a New Keynesian and Monetarist agree on a point like this it is because we are dealing with a very basic point about economics and how to apply it to the real world.

However, I will admit that I am not all that optimistic about actually determining the number of jobs saved or created by the use of models based on historical data. This is because the economy may be undergoing important structural changes. As I said in August:

The statement that the stimulus has already saved or created a certain number of jobs is not a brute fact – like the presence of the table upon which I am writing. (This is not literally a brute fact, but let that pass.) It is the implication of a theory or a model about how the economy is supposed to work. Suppose the economy is hypothesized to function as a more or less Keynesian mechanism. Let us say that looking backward, the model fit the actual economy’s behavior over the relatively normal past. We shock or “stimulate” it with various amounts of spending. Then, if previous relationships hold, we get results.

Since forecasting is usually a terribly inaccurate business, using a model – no better than any – to tell us what would have happened if we did not have the stimulus is not likely to produce reliable results – even  under normal conditions. Is it reasonable then to think that such a model or models based on past data will fit these abnormal times? Recall economists of many stripes have been telling us that we are in unprecedented times.

When such models are used for forecasting, the future comes into actuality and we see how far wrong we were. But contrary-to-fact worlds don’t occur to test the “prediction” of how well off we would have been. (How well do these models predict where we are? We’ll have to see.)

One possible reason that Krugman and DeLong are so upset is that they want more stimulus and so it is necessary to show that the current stimulus is doing good. At the beginning of the year and before the stimulus bill had been passed, Team Obama came up with a model to show what the unemployment picture would be without stimulus. Quite embarrassingly, that model predicted that we would have less unemployment now without the stimulus than in fact we have!  (See here and here.)

Details aside, Krugman and DeLong either need to think more deeply about economic method or express themselves more clearly. All the talk about “shame” and “moral responsibility” is, in this context, a distraction.

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